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United Kingdom Monetary Policy

United Kingdom: BoE refrains from further QE, will transfer gilt interests to government

November 21, 2012

At its 7-8 November meeting, the Bank of England (BoE) maintained its policy stance, leaving the Bank Rate unchanged at 0.50% and the volume of its Asset Purchase Facility (APF) - also known as quantitative easing (QE) - at a total of GBP 375 billion. Both decisions were in line with market expectations. According to the minutes, all nine members of the Monetary Policy Committee (MPC) voted in favour of leaving the Bank rate unchanged at 0.50%, with the Committee judging a rate reduction unlikely "in the foreseeable future". Moreover, eight MPC members were in favour of maintaining the size of the asset purchase programme, with only one member proposing a GBP 25 billion increase. Meanwhile, the Treasury requested that the Asset Purchase Facility's (APF) excess cash holdings - the accumulated interest payments from gilts minus costs and expenses - should be transferred from the Bank to the Exchequer. Both institutions highlighted that this is common practice in the United States and Japan and that, as the Treasury provides an indemnity on the APF, any gains or losses are ultimately due to the Exchequer. That said, the Treasury acknowledged that future cash flows are likely to "be reversed in order to meet the terms of the indemnity, as monetary conditions normalise and Bank Rate rises, or capital losses crystallise as gilts are sold or allowed to redeem without reinvestment". The government declared it intends to use the funds exclusively to reduce its outstanding debt, which the Bank stated should be considered in its policy decisions, as it "amounts to a small loosening of monetary conditions". That said, the BoE left the door open for further expansion of its asset purchase programme going forward, with Governor King recently stating that the MPC has "not lost faith" in QE.

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